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New Drug Price Proposal Light on Competition, Heavy on Bureaucracy

Last Friday, Hillary Clinton announced a new plan to “respond to unjustified price hikes” on certain pharmaceutical drugs. This comes after weeks of public debate over the rising price of the EpiPen, a device used by people experiencing life-threatening allergic reactions. It also comes after last year’s media firestorm over the decision of Turing Pharmaceuticals CEO Martin Shkreli to dramatically raise the price of the drug Daraprim. The plan, which contains three main recommendations, is encouraging in its initial suggestion of greater competition as a solution, but is still troubling in its insistence that government agencies police individual price increases and micromanage the conditions under which existing anti-competitive restrictions would be relaxed.

Clinton’s plan specifically targets drugs that have “long been on the market” or that have been sold off by their original developer and are currently being marketed by a new company – both conditions that suggest a reaction to the Turing/Daraprim controversy. As I wrote back in December, the problem with drugs like pyrimethamine, which is the generic form of Daraprim, is that even though it is long since off-patent, the Food and Drug Administration’s current rules make it difficult and expensive for other companies to offer generic alternatives. As former Food and Drug Administration official Dr. Scott Gottlieb pointed out last year in The Wall Street Journal, high drug prices “aren’t the result of market forces gone wild. Rather, they are the result of bad regulation that has created market failures and shortages.” Gottlieb points out that a generic drug approval request can cost $20 million and take over four years. And that’s for exactly the kind of drugs that we’re depending on companies to sell cheaply.

As it turns out, reform to the generic drug approval process is one of the three major planks of Clinton’s recent proposal, which calls for “supporting generic and alternative manufacturers that enter the market and increase competition to bring down prices.” But rather than simply roll back limitations on manufacturers, the plan would require government agencies to determine what qualifies as “insufficient” competition, what constitutes an “unjustified” price increase, and only allow expedited access during “emergency” situations. Why recruit an entire federal task force on drug prices to debate each of these conditions when we could simply be repealing barriers to entry? The FDA’s own bureaucracy has created a painfully slow wait for new drugs to be approved, but the new plan suggests layering another complex approval process of top of that.

The plan also suggests “broadening access to safe, high-quality generic and alternative competitors” from overseas sources. This proposal has some superficial appeal because, at its heart, it appears to mean lowering government-created barriers to market access. For years, FDA reform advocates have proposed establishing drug approval “reciprocity,” under which drugs approved in foreign countries with safety and efficacy standards similar to those of the FDA would be automatically approved in the United States. But this is not what Clinton is proposing. Instead, access to drugs under her plan would only be permitted temporarily, under the detailed supervision of the FDA, and only in “emergency” situations, as determined by the government. Instead of real competition, Clinton’s proposal once again relies on layering more complex bureaucracy on top of our current, dysfunctional approval system. Freeing up doctors and patients to seek drugs from overseas, especially from countries with strict approval systems similar to the FDA itself, should be an open-ended market process rather than just another line to wait in. Fewer rules will bring about the desired solution faster. If the need for expanded access is as dire most people agree it is, that should be the focus.

The final plank of the new plan consists of punishing drug companies that raise their prices to what “our public health and competition agencies” would consider to be an unjustified level. This is a judgment call for which there are no obvious criteria. The plan says that the “trajectory” of the cost increase and the firm’s current cost of production would be taken into account. But what about the sales of the company’s other drugs, its R&D pipeline, its competitors’ products, its own patent expiration timeline, and its existing contracts with distributors and insurance companies? Can we depend on these future price controls to change when market dynamics change? The value of a publicly traded company fluctuates every day. Managers and directors are constantly adjusting their resource allocation strategies in response. Even if we disregarded returns to stockholders as a concern, the desire to maximize available treatments for patients alone should make us very skeptical of letting a government agency (much less multiple government agencies operating simultaneously) meddle this deeply in the operations of such a complex operation.

This new three-point plan doesn’t necessarily stand on its own, though, as it’s simply the most recent update to Clinton’s broader plan to rein in drug prices, which has been public for almost a year. Unfortunately, that more detailed plan suffers from many of the same defects. It depends on adding new regulations and price controls, and would actually lead to fewer choices and higher prices.

The market for pharmaceutical drugs in the United State is highly imperfect and in need of reform—not because it is characterized by too much laissez-faire capitalism, but because of too much government interference. Government has distorted the normal functioning of the health technology market by regulating everything from how drugs are tested and approved to how they are purchased and by whom. Reducing regulatory barriers to innovation and giving doctors greater choice in sourcing treatments for their patients should be an obvious first step toward a world with more rational drug pricing.